Thursday, 20 December 2012

Proposed EU regulation “potentially devastating,” says the Baltic Exchange

The Baltic Exchange is getting increasingly concerned that business will move out of Europe with the EU’s plans to tighten regulation of the financial markets. The Baltic sees itself as the heart of world trade; established in the mid-18th century, it continues to be a prominent player even today, publishing daily indices that are commonly used to settle contracts and set freight rates for up to three quarters of global seaborne trade.

The EU wants to put in place systems to eliminate what it sees as market manipulation. The European Commission is reviewing trade data and how it is used to set benchmarks; if these include shipping indices, says the Baltic, some maritime companies would leave for Asia. 

Brussels’ intention to regulate is seen by many as a natural fallout of the recent scandal over the rigging by a dozen well known banks of the London Interbank Offered Rate (Libor).  As a result, the EU wants to propagate new rules on the compilation of market indices, and has invited market stakeholders to comment on the possible new rules.

“Any attempt to impose a regulated responsibility for contributions risks either driving businesses out of the jurisdiction or reducing the quality of contribution,” the Baltic Exchange said in a submission to the EU. “Government intervention in the production or distribution processes would be potentially devastating, with unpredictable consequences.”

"What concerns us is ... the idea that we might get caught up accidentally in regulatory change which is being imposed across the piece," CEO of the Baltic Exchange Jeremy Penn says. The Exchange feels that its time-tested system of self-regulation makes it a special case, and that shipping- a private, global market- should be treated differently. “Unilateral action by the EU would either support the production of rival indices in Asia or drive the Baltic Exchange production process outside the jurisdiction," Penn said.

In summer this year, Barclays was fined $465 million by US and British authorities for manipulating the benchmark Libor. Penn says that, although there are issues with some benchmarks, “it would be a great shame if there was some assumption that all markets should be treated in the same way. The risk is they make it very difficult for the Baltic to produce what are well respected, heavily used benchmarks."

The Baltic Exchange's indices and rates were launched in 1985 and are put together by a global panel of shipbrokers- who do not trade in the market. The Baltic’s dry freight index, the BDI, is an undisputed global benchmark. "It is a fair reporting system that is robust and has passed the test of time for almost 30 years," says Professor Nikos Nomikos of the  Cass Business School. 

The larger threat of EU regulation may be faced by the couple of hundred ship broking firms in London. With an estimated $1.5 billion turnover on UK operations alone, any dilution of the Baltic’s importance will almost certainly have a fallout here. Shipbrokers in London say that the Baltic is independent and should be left alone. They fear that the rise of Asia is a threat to their businesses in any case, and the EU’s moves will only make matters worse. 

"The opportunity for third parties to produce alternative benchmarks is there at any time," Penn 


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